By Michal Bacia
In April of this year, the British Government, through its Department of Energy & Climate Change, announced “…plans to turn the Government estate as well as factories, supermarkets and car parks into solar hubs.” This is huge! Translation? Government support for solar PV distributed generation (DG). Yay!
The UK solar industry (at least some companies) do not share my excitement about this shift in government strategy. They are worried about decreasing support for large-scale solar farms, which is completely understandable when they have a pipeline of utility-scale projects already lined up. An announcement of lower support for solar farms means they have to hurry up and build them ASAP. Without enough qualified manpower, building all these planned projects before March 31st, 2015 will be difficult.
For the general public, a green light for DG solar is great news. Here is why:
Renewable energy (RE) was an environmental thing at first. The EU pushed RE obligations because it was concerned about CO2 emissions, the climate, and polar bears. When you talk about the environment or future generations you can’t really put a price tag on it. It’s a political issue, not a business one. Germany and Denmark, for example, said OK, we want clean air and low CO2 emissions and we are willing to pay for it with high electricity prices. Others, who were not so interested in the environment, said NO WAY, RE is too expensive, high energy prices will kill our economy, we will lose jobs, etc. For them, RE was a luxury they couldn’t afford.
In reality, the question of how RE influences economy is more complicated. It’s far more than just a question of how much energy costs. It’s a question of where does that money go.
In the ’90s, the UK was an energy exporter. Thanks to natural gas and oil resources, the country was able to cover all its energy needs with domestic resources. They were even exporting surplus. In the mid 2000s, however, the situation changed completely. Production from the North Sea dropped and the country had to start importing energy. According to the US Energy Information Administration (EIA), in 2011 alone, the UK imported 388 thousand (388,000) barrels of oil per day. Given the average oil price of USD 111 or GBP 68.82 per barrel, this amounts to an annual spending of GBP 9.5 BILLION! And this is just the oil alone. Other energy imports included (and still include) natural gas, coal, and uranium.
What does this mean for the economy? Exporting jobs. Instead of spending all this money domestically and creating local jobs, it is sent abroad. It was estimated for the US economy that each $1.00 spent at the gas station generates $0.40 revenue for the national economy… the rest goes ABROAD. Each $1.00 spent on domestic oil generates $3.00 for the national economy, thanks to the multiplier effect. The ratios for the UK might be different, but the essence is the same: money that stays within the economy circulates, creating more jobs and generating more taxes.
This relation is even more evident when oil prices go up. James D. Hamilton, Professor at the University of California, San Diego, noticed that 10 out of 11 recent economic recessions in the US, were preceded by a sharp oil price increase. In developed countries, oil imports are relatively small compared to the national economy: about 2% of GDP. But, the influence of oil price spikes is non-linear and, therefore, much more significant.
It takes time and capital expenditure to adjust to new, higher prices of energy. Think of new energy-efficient buildings or buying smaller, more-efficient (electric) cars. It take a while to adjust.
Short term, more expensive oil and/or energy makes people stop spending money on other things. More comes out of their pocket for the same amount of energy to drive to work, heat the house, etc. Automatically, people spend less on other things such as clothing, entertainment, holidays, gifts, buying lower quality food, etc. This means that any businesses providing these services/items sell less, earn less, and most likely have to fire people. This begins a cycle of an even lower demand for goods and services as these businesses are placing smaller orders, or no orders at all from manufacturers and factories. And the downward spiral continues…. all because oil has no easy substitutes. Prices are driven by international markets and are controlled by a small number of organizations.
Denmark’s example shows that it’s OK to pay high electricity prices, only as long as the energy is produced domestically. The economy won’t be devastated. Danish electricity prices are about twice as high as British prices, yet GDP per capita in Denmark is higher than the UK and the unemployment rate in slightly lower in Denmark.
OK. So it looks like generating energy domestically is an answer. But assuming that all energy resources are domestic (renewable or not) it is best to go for the cheapest energy option, right? Well, let’s see.
Electricity produced and delivered by the Big 6 energy companies in the UK are perceived as the cheaper option to renewables, especially rooftop solar. Again, it’s interesting to see what happens to the money paid in utility bills. In 2012, the Big 6 British energy companies made a combined profit of £3.7 billion. Between 2010 and 2013, energy prices rose by 36%. Out of the 6, only 2 companies are actually British. Again, the supply side of the energy market is controlled by a small number of organizations, allowing for a massive transfer of value from customers to corporations.
Promoting solar DG changes the balance of power. Instead of the Big 6 energy suppliers, the government wants to have 60,000 (distributed) suppliers. This means that the support (in a form of feed-in tariffs, for example) will be distributed among many small and mid-sized companies, families, and NGOs. The money collected from consumers in energy bills to support RE will go straight back into local communities, creating local jobs. BTW, more than half of the solar installation costs are local costs (planning, engineering, construction, maintenance, financing). With solar, there are no fuel supply issues – fuel is free and abundant. This means less money spent on (imported) fuel and more spent or invested locally. This also means energy price spikes will have less influence on the economy. Finally, there is no need to invest in the electricity transmission and distribution network as most energy is consumed on the generation site.
Now, add solar crowdfunding into the mix and we have a perfect solution for energy self-sufficiency and prosperity! With crowdfunding, people invest directly in (shares of) energy generation projects. This means that no matter what happens on the market, they will benefit. In cases of generous support for solar and higher electricity bills, they will receive higher returns on their solar investment. When support is lower and energy prices are lower, they experience the immediate benefit of lower energy bills.
Looks like a win-win to me. Well done, UK — congrats!
Michal Bacia is a solar energy project manager and consultant as well as an author. He recently completed 3 solar sites in the UK (20MWp in total) and published a book about solar energy for anyone who uses electricity (How to choose the best solar system and financing offer for you).
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